A new DGT must be shown as a purchase (you cannot transfer money in to set up a new DGT, unlike other forms of Trust in the software).
On the Dashboard screen, click the + button and select Savings & Investments, then choose Investments.
Use the drop down arrow in the Type field to select DGT (there is a choice of Onshore/Offshore), set 'Is this an existing investment' to No, and enter the purchase value. Note that currently it is not possible to enter a jointly owned DGT. Set an appropriate fee rate and click Growth to set an appropriate growth rate.
Set the timing for the purchase of the new DGT by clicking Timing and drag the appropriate event into the Contributions Start box (or click on the event and then click Set as start event). As this is a one-off purchase you do not need to complete the Contributions end box.
Further down the basics screen the investment is then split as follows.
1. A “discounted” element is entered in the Discount Amt field. This discount leaves the Estate on day one, on the basis that it provides a lifetime income based on the individual's assumed life expectancy at the date the gift is made. These are figures you will need from the provider.
2. The remaining amount of the purchase price is deemed to be the amount gifted to the beneficiaries of the Trust and is treated as a PET so that it leaves the Estate after 7 years.
3. The Income Amount field is used to specify the amount that is to be drawn annually from the Discount Amount, as income.
Go to the appropriate sections on the left hand side to set the growth rate and nominate the beneficiaries of the DGT.
Click Done to save the new DGT into the plan.
Go to the Lets see screen to check how the new DGT is being modelled. The chart will show a spike in the Need line in the year of purchase, since purchasing the DGT is an expense.
Click on Year view>Expenses to see the purchase expense:
In the following year, you should expect to see the income from the DGT coming into the cashflow -on the Cashflow Detailed view you will see the income as yellow and if you check Year view>Cashflow you will see the income:
Discounted gift trusts and IHT calculations
The discount is the amount that is effectively being "carved out" of the trust to provide the income.
This amount does not fall back into the estate on death within 7 years. The balance (non-discounted) would be included in the estate in the event of death within 7 years. The non-discounted balance placed into the DGT will be treated as a chargeable lifetime transfer (CLT) or a potentially exempt transfer (PET) depending on whether the trust is discretionary or bare, respectively.
The DGT is a “discounted” Potentially Exempt or Lifetime Transfer. The discount is the proportion of the gift that is deemed to be attributed to providing a lifetime income.
The key point is that the discount leaves the Estate immediately, i.e. it is not clawed back into the Estate if the donor dies within 7 years; the non-discounted element is treated as a PET or, if the cumulative gifts over 7 years have exceeded the Nil Rate Threshold, is subject to the Lifetime Tax charge (20%).
The withdrawals can continue for the donor’s lifetime until or unless the discount is exhausted – the Trust is treated as a single entity in terms of calculating tax on withdrawals (e.g. in the example, the £5000 withdrawals would be treated as representing 5% of the initial investment so would be tax deferred for 20 years) and investment return is applied across the whole fund. You would expect the discounted amount to remain about static or decline dependent upon the level of withdrawal and the modelled growth; the non-discounted amount would grow through investment return.
If your new DGT is being purchase in Year 1 of your plan, you can use the Legacy>immediate legacy view to see how the software is accounting for the PET. This view assumes death at the end of year 1, the DGT will appear in the Life assurance category, with the end of year value, ie assuming one year's growth.
If you check the Estate Distribution and Inheritance tax section you will see the non discounted element ie £300,000 - £125,000 = £175,000 in our example, showing as a CLT, the non exempt value shown is reduced by £3000 assuming that David's Annual Exempt Gift allowance has been offset against it. The non exempt element therefore reduces David's available nil rate band.